Defend against downgrade with dividend stocks
As markets tumble, a fund manager recommends shares of 10 companies, including AT&T, Verizon and McDonald's.
By Robert Holmes, TheStreet
Oliver Pursche, the manager of the $20 million GMG Defensive Beta Fund (MPDAX), said one of his largest clients phoned him late Thursday, concerned about the sharp sell-off in equities. Like most individual investors who were lost and blindsided by the bleeding, Pursche's client was looking for direction.
"He was very nervous. He wasn't quite freaking out, but he said, 'Oliver, this is one of the times I need you to tell me everything is OK,'" Pursche said by phone Friday from his office in Suffern, N.Y.
In the time since that broad drop in stocks Thursday, uncertainty about the future has been ramped up after the decision by Standard & Poor's late Friday to strip the U.S. of its prestigious triple-A credit rating.
Pursche, though, manages to volatility and risk, not return. Volatility had been increasing heading into May, so he raised cash and increased his firm's exposure to short-term bonds. While many prognosticators and commentators are split about whether equities are a screaming buy or whether this is the beginning of Armageddon, Pursche told his client that the best course of action is to remain calm.
"History has shown time and time again that investors who allow their emotions to get the best of them tend to dramatically underperform the markets and fellow investors who have the fortitude to stick with their plan," he says. "Our advice and actions aren't about catching a falling knife. We're comfortable about our allocation."
Some investors are worried that the market will experience a crash like the one that occurred after the collapse of Lehman Bros. in 2008. Last week, the Dow Jones Industrial Average ($INDU) suffered its biggest loss since those dark times, so investors are understandably worried. Pursche, though, argues that conditions are much different than they were three years ago.
"The market crash of 2008 and early 2009 was caused by a combination of excessive leverage -- in particular, in the financial markets -- and a lack of liquidity," he says. "By contrast, today, banks and other institutions have decreased leverage -- in some cases as a result of being forced by new regulations -- and governments around the world have stepped in and continue to provide enormous amounts of liquidity. Structurally and fundamentally, that is a very different environment than three years ago."
Pursche highlights the differences from a mere four months ago, shortly after the earthquake and tsunami that rocked Japan.
"Look back to April. We had Japan. We also had social unrest and revolts in North Africa and Egypt and Libya," he says. "We had the possibility of real social unrest in Syria, Lebanon and other parts of the Middle East where nuclear weapons are floating around. There was a lot of really bad news going on and the market completely ignored it."
Now investors are witnessing the exact opposite. Earnings from U.S. companies remain strong, but equities continue to fall as investors flee to the safety of government Treasuries and gold.
"There's a lot of focus on the bad and none of the focus on the good. That's where you get market inefficiencies," Pursche says. "I can't control the market. There's not a damned thing I can do about it. But I can control volatility. If you believe there will be an uptrend, you want to control the volatility so you participate in a good chunk of the upside but you limit your downside as much as possible."
Rather than over-react and rush to buy anything that looks cheap, Pursche continues to follow his strategy of investing in companies with strong dividends, lots of cash, and a good overall business.
"You want to focus on those companies and areas that will significantly benefit from the areas that are growing the most," he says. "The reality is that you don't want to over-react and rush to judgment in this type of environment."
First, Pursche notes the attractiveness of multinational companies like Yum Brands (YUM), which derives a substantial portion of its revenue from outside the U.S. He also calls attention to energy name Total (TOT), Synovis (SYNO) in the health care space, SAP (SAP) in Germany, and McDonald's (MCD) in the U.S.
Pursche said he's allocated in defensive dividend stocks, which should help protect against any excessive losses in the stock market. In preparing for market volatility, he sought out well-diversified, consumer nondiscretionary businesses that are very stable.
"Here are two companies that are very U.S.-centric with no material exposure to Europe," he says. "That insulates them from a sales and revenue perspective from the problems in Europe."
In terms of what he's avoiding, Pursche says investors don't want to just buy index funds or broad-based market funds. "You want to be selective with your investment decisions. They'll go down in volatile times, but they'll go down less," he says. "On a long-term basis, they'll outperform to the upside as well."
Copyright © 2014 Microsoft. All rights reserved.
It's time for a reality check in advance of the Chinese e-commerce giant's much anticipated initial public offering.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.